Could Fortescue Metals Group Limited (ASX: FMG) be the best ASX dividend share?
Fortescue is one of the largest iron ore miners in Australia. Andrew Forrest, with a nickname of ‘Twiggy’, is a major shareholder of the company. He’s currently the non-executive chair.
Is Fortescue the best ASX dividend share?
The company had a very strong year in FY20.
It mined 204 million wet metric tonnes (wmt) and sold 177.2 million wmt (up 6%). Perhaps most importantly, the realised price increased by 21% to US$78.62 per dry metric tonne (dmt) whilst the C1 cost/mining cost declined 1% to US$12.94 per wmt.
As a mining business, how much it mines and what it can sell it for is the main driver of profit.
The increase in the price for iron ore helped underlying EBITDA (EBITDA explained) grow by 38% to US$8.4 billion, net profit after tax grew by 49% to US$4.7 billion and earnings per share (EPS) rose by 49% in US dollar terms to US$1.54 and in Australian dollar terms it increased 59% to AU$2.29.
It was this strong profit growth that helped fund an increase in Fortescue’s dividend of 54% to AU$1.76 per share.
At the current Fortescue Metals Group share price that means it has a trailing dividend yield of 14.3% including the franking credits. That is a huge yield. And that’s after a huge run up of the share price over 2020 (and 2019).
It certainly offers the biggest yield that may be somewhat sustainable. Even a 10% yield would be big.
Is it a safe dividend?
If resource businesses generated consistent profits and reliable dividends then they’d be priced even higher than they currently are.
Resources are usually cyclical. But iron ore is showing a strong performance thanks to continuing demand from China. Iron ore prices are also being pushed up by COVID-19 disruptions in Brazil which is causing a reduction in production and shipments.
The last seven years of dividends of Fortescue has been a bit all over the place, but the last two financial years have been very strong.
Fortescue is a bigger business than it was in a previous years, and it’s expanding its shipment capabilities. It’s hard to say how long this iron ore strength will continue.
I don’t think the top of the cycle is the best time to buy a miner like Fortescue. There are other ASX dividend shares I’d prefer to buy like Brickworks Limited (ASX: BKW), though the yield isn’t as high Fortescue’s I think it has more chance of being maintained and growing.
